As a small business owner, you want all the flexibility, tax advantages, and personal protection you can get. Fortunately, forming a Limited Liability Company (LLC) can give you all three of these benefits and more in one fell swoop.
At Landmark National Bank, our business banking experts are here to help educate you on what an LLC can do for your business. Below, you will discover exactly what forming an LLC means, its benefits, as well as how a small business owner can apply for one.
What is an LLC and what does it stand for?
The acronym “LLC” stands for the phrase “Limited Liability Company,” and forming one is an easy and inexpensive way to structure your small business. An LLC provides you with the personal liability protection of a corporation, as well as pass-through treatment of income for tax purposes.
Simply put, establishing an LLC can protect your personal assets if your business is sued, and it allows the profits (or losses) of your business to be taxed at your personal tax rate.
Who qualifies for an LLC?
LLCs can be formed by any person starting a business or currently running a business as a sole proprietorship or within a partnership. While LLCs can be used to run or own nearly any type of business (for example, LLCs are typically formed to own rental or commercial properties), some states require business owners to establish a specialized LLC, which is called a Professional Limited Liability Company (PLLC).
What are the pros of an LLC?
Forming an LLC for your small business provides you with many real-world advantages, including:
Protecting Your Assets
The phrase “limited liability” in an LLC refers to the individual protection this business structure provides. An LLC provides small business owners with a safety net by limiting their personal liability. This means that the assets of the business itself (not the personal assets of the business owner) are liable in the event of business-related lawsuits, liens, or debts.
Due to the lack of personal liability, creditors or individuals who file lawsuits against an LLC can’t collect against personal assets like your personal vehicle, personal bank account, or primary residence. They are strictly limited to collecting from your LLC’s assets.
Note: The personal liability protection of an LLC does not cover illegal acts committed by an LLC owner.
Forming an LLC provides small business owners with pass-through taxation perks. This means that profits associated with the business are reported on personal income tax returns and taxed at personal tax rates. It’s important to note that LLC owners may also qualify for a special pass-through tax deduction generated by the Tax Cuts and Jobs Act. This income tax deduction could allow LLC owners to deduct up to 20% of the net business income earned each year.
While standard LLCs typically provide pass-through taxation, filing an election through the IRS allows them to be taxed like an S Corporation or a C Corporation. With C Corporation taxation elected, an LLC pays taxes on the business profits at the corporate tax rate of 21%. With S Corporation taxation elected, the LLC remains a pass-through entity, but it is not subject to Social Security or Medicare taxes.
Ease of Use and Adaptability
LLCs are the most basic business entity to establish and operate, and they provide enormous adaptability for different business-related circumstances. For example, LLCs do not place limits on the number of owners (or members) a business can have. Additionally, LLCs can be managed by any owner or member of the business, and they provide the option to designate specific managers, too.
One of the biggest benefits of forming an LLC is creating a sense of trust with your customers or clients. Along with having an official business name to use, your LLC will help to reassure your business’s credibility.
How to Form an LLC for Your Business
Forming an LLC for your business is a straightforward process, but it’s important to remember that each state has its own set of LLC requirements. In general, establishing an LLC is a multi-step process that includes:
Selecting a Business Name
When forming an LLC, your business’s name must be unique in the state you plan to do business in. When filing for your LLC, your state will let you know if your business’s name is available for use. Additionally, your business must adhere to your state’s LLC naming conventions, which generally means your business’s name must also include “LLC” in the title.
Writing and Filing Articles of Organization
While this name may vary from state to state, Articles of Organization allow you to establish your LLC in your state. These articles typically require you to fill out general information about your business, including your LLC’s name, address, and the names of the owners or members of the business. In some states, each member of an LLC must sign the Articles of Organization, but others only require one member’s or owner’s signature.
Designating a Registered Agent
Many states require you to designate a registered agent to form an LLC. This agent is the business owner or member that represents the LLC and receives any legal paperwork in the event of a lawsuit.
Paying Required Fees
LLC fees vary from state to state. Typically, these fees can range anywhere from $100 to several hundreds of dollars.
Publishing a Notice of Intent
If you live in Arizona, Nebraska, or New York, you are required to publish a legal notice of intent in a local newspaper. These states may also require you to publish your notice of intent several times over the course of weeks or months, as well as file an affidavit of publication with the state.
The Importance of Creating an LLC Operating Agreement
If your business has multiple owners, it is critical to create an LLC operating agreement—even if it is not required by your state. This document details the rights and responsibilities of each owner, which provides a general framework to help deal with business conflicts or transfers of ownership. While your operating agreement can be as detailed as you need it to be, it should specify things like voting power, percentages of ownership in the business, and more.
Forming an LLC in Kansas?
If you’re planning on forming an LLC in Kansas, Kansas Business One Stop is your go-to solution for starting and maintaining a business. No matter if you’re just getting your startup off the ground or your business is expanding, this convenient government resource provides you with information on structuring, operating, and growing your business—as well as quick access to important documents you will need when forming your LLC.
Manage Your LLC’s Finances with Help from Landmark
Forming an LLC not only gives your small business credibility, but it also allows you to protect your personal assets, gain access to unique tax breaks, and establish a centralized structure for your enterprise.
Once you have your LLC established, you need a business banking partner to help you manage your finances. With Landmark National Bank, our suite of business banking services can help you keep your personal and business-related finances separate. Additionally, we provide unique tools like online cash management, merchant card services, business credit cards, and more so you can get all the solutions you need under one roof.